Marathon Petroleum Corporation — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; filed February 24, 2017. The filing also reports fourth-quarter results. MPC operates Refining & Marketing, Speedway and Midstream, including its consolidated subsidiary MPLX. The 2015 comparison includes MarkWest only from its December 4, 2015 acquisition date, limiting direct comparability.
Financial results and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue, including consumer excise taxes | $63.339 billion | $72.051 billion |
| Income from operations | $2.378 billion | $4.692 billion |
| Net income attributable to MPC | $1.174 billion | $2.852 billion |
| Diluted EPS | $2.21 | $5.26 |
| Cash from operating activities | $3.986 billion | $4.061 billion |
| PP&E additions | $2.892 billion | $1.998 billion |
| Dividends paid per share | $1.36 | $1.14 |
Revenue fell about 12% and MPC-attributable net income about 59%. Refining & Marketing operating income declined to $1.543 billion from $4.086 billion; Speedway rose to $734 million from $673 million; Midstream rose to $871 million from $380 million. The filing reports Refining & Marketing gross margin of $11.26 per barrel, down from $15.25, and total refinery throughput of 1.850 million barrels per day, down from 1.888 million.
Fourth-quarter 2016 revenue was $17.155 billion, operating income $553 million, net income attributable to MPC $227 million and diluted EPS $0.43, versus $15.607 billion, $338 million, $187 million and $0.35, respectively, in fourth-quarter 2015.
Cash and cash equivalents were $887 million on the consolidated balance sheet, including $234 million at MPLX. MPC reported $4.837 billion of liquidity, comprising $4.184 billion of available MPC borrowing capacity and $653 million of cash; this liquidity figure excludes MPLX cash and its credit facility. Year-end debt, including capital leases, was approximately $11.1 billion; the reported debt-to-total-capital ratio was 33%, versus 38% in 2015. MPC reported compliance with its debt covenants; MPLX’s debt-to-EBITDA covenant ratio was 3.26x.
Material changes and unusual items
- Lower refining crack spreads and higher turnaround costs drove the principal earnings decline. The blended LLS 6-3-2-1 crack spread fell to $6.96 per barrel from $9.70.
- A $370 million non-cash inventory lower-of-cost-or-market reserve recorded in 2015 was reversed in 2016 as prices recovered, benefiting 2016 results. No reserve remained at year-end.
- 2016 included $486 million of unallocated impairment charges: $267 million for the indefinitely deferred Sandpiper pipeline project, $130 million of MarkWest-related goodwill and $89 million for an MPLX equity-method investment. The Sandpiper charge impaired virtually all of MPC’s approximately $301 million investment.
- MarkWest’s inclusion for a full year increased Midstream scale and also contributed to higher depreciation and interest expense. MPLX goodwill impairment was associated with weaker commodity outlooks, reduced producer spending and higher cost of capital.
- MPC contributed its inland marine business to MPLX for units, and Speedway contributed 41 travel plazas to the PFJ Southeast joint venture. These transactions affected segment presentation and asset mix.
Outlook, risks and contingencies
- In January 2017, MPC announced plans to accelerate 2017 dropdowns of midstream assets estimated to generate $1.4 billion of annual EBITDA. The indicated valuation range was 7–9x EBITDA; expected aggregate financing was approximately half debt and half equity. Completion depends on approvals, tax clearance, market conditions and agreement on valuation. MPC also expects to exchange its MPLX general-partner economic interests, including IDRs, for MPLX common units.
- MPC’s 2017 capital plan was $1.7 billion, excluding MPLX. MPLX planned $1.4–$1.7 billion of organic growth capital and approximately $100 million of maintenance capital. MPC’s plan included $1.17 billion for Refining & Marketing and approximately $380 million for Speedway. The filing anticipates approximately $422 million of environmental capital expenditures in 2017.
- A board special committee was reviewing Speedway strategic and financial alternatives, with an update expected by mid-2017. MPC also described a roughly $1.5 billion, five-year STAR project at Galveston Bay.
- Key business risks include volatile refining margins and commodity prices; refinery outages and turnaround costs; producer drilling and volumes affecting MPLX; competition; RFS/RIN compliance costs; environmental regulation and remediation; severe weather, transport disruptions and cybersecurity. Management cautions that the announced strategic actions and project returns are not assured.
- Environmental remediation liabilities were $132 million at year-end, with $58 million of related recoverable-cost receivables. The filing describes unresolved Kentucky antitrust litigation with losses not estimable, and a separate Kentucky pricing lawsuit alleging $89 million in overcharges; management stated it did not expect the latter to have a material adverse effect. An EPA proposal concerning MarkWest civil claims included an approximately $2.4 million penalty and $3.6 million of environmental projects; negotiations continued. A 2016 pipeline release near the Wabash River was subject to regulatory enforcement, with potential penalties noted as exceeding $100,000.
- MPC’s auditor issued an unqualified opinion, and management and the auditor concluded internal control over financial reporting was effective as of year-end.
Investor verification priorities
- Track refining margins, refinery utilization, turnaround costs and whether margin recovery offsets the 2016 decline.
- Verify the valuation, funding, approvals and completion of planned MPLX dropdowns and the proposed IDR/general-partner interest exchange.
- Assess MPLX leverage, cash distributions, producer volumes and exposure to commodity-linked contracts alongside its growth-capital commitments.
- Review Speedway’s strategic-review outcome and the sustainability of merchandise margins and retail fuel profitability.
- Monitor legal and environmental matters, guarantees, remediation estimates, and the assumptions underlying impairment testing and the $370 million inventory-reserve reversal.